HMRC’s planned IR35 reform cuts no ice with public sector
The Government’s consultation on IR35 reform in the public sector closed last week but it appears that it is not just the contracting community who are opposed to the proposals.
A recent survey of 95 public sector employers, carried out by the Recruitment & Employment Confederation (REC), found that the majority felt there was no need for change as they were confident in how to assess IR35. In assessing an interim manager or contractor’s IR35 status, 18% were very confident and 47% were somewhat confident. A further 22% said there was no need for them to consider whether or not IR35 applies as, under the current rules, this is the contractor’s responsibility. That is a worrying ignorance as public sector bodies have to assure themselves that a freelancer is genuinely outside of IR35 or suffer the consequences, ie a Treasury fine.
Under the Government’s proposals, as from April 2017, the responsibility for determining a contractor’s IR35 status will fall upon the agency/public sector organisation who will also be responsible for deducting PAYE tax and NIC should they deem a freelancer caught by the intermediaries legislation.
When asked what they thought would happen if more contractors are found to be inside of IR35 because of the implementation of the proposals, public sector employers gave the following responses:
- 43% – fewer interim managers/contractors would want to work within the public sector
- 26% – their organisations would have to reduce their use of freelancers and interims
- 10% – it would make no difference to them
This is corroborated by a survey carried out by the IPSE amongst freelancers, as nearly a third of contractors surveyed indicated that they would abandon the public sector and a quarter said that they would terminate their existing public sector contracts if they were forced onto the payroll. A most significant 81% said they would seek contracts outside the public sector.
The IPSE survey also revealed that 39% of contractors would be left with no choice but to increase their daily rates to counter any additional tax and NIC liabilities. However, the Cabinet Office are already exploring the rates that would have to be paid to contractors to ensure that they would be no better or worse off than now if found to be within IR35 under the proposals. Whilst this is a positive move it comes as an unnecessary expense to the taxpayer as the Government wouldn’t need to compensate in this way were it not for their planned reforms.
If these surveys represent the genuine feeling amongst the contracting community and public sector bosses, then the Government needs to reconsider its position. Around 26,000 contractors operate within the public sector arena, contributing £3.5 billion to the economy last year. In total freelancers contributed nearly £38 billion to the UK GDP in 2015 and their value should not be underestimated.
With the status indicator tool not yet ready and a tide of opinion in opposition to the proposals then perhaps the Government should allow themselves some extra thinking time and defer implementation of their plans and come up with something more palatable.
“However, the Cabinet Office are already exploring the rates that would have to be paid to contractors to ensure that they would be no better or worse off than now if found to be within IR35 under the proposals.”
Is that really what they are doing? Because if it is it misses the point entirely.
There was never any suggestion that anyone who’s inside IR35 would be worse off than now – it’s hard to see how they could be, since those inside IR35 pay every form of employment tax known to (UK) Man!
The issue is the probability of being inside has increased and the only way to make that go away is to scrap the changes.
The only way this works is if freelancers are saying to clients/agents: “I will only take this contract if it is (1) outside IR35 or (2) the rate is increased by 20%”.
How does Option 1 help the Treasury if their aim is to take more tax under IR35? That seems the more likely outcome since people who have previous contracts will be very uncomfortable that they are more likely to be retrospectively viewed as being caught.
For Option 2 to become the norm, businesses would effectively be paying the extra – and that will lead to a backlash.
In practice, many clients offer contracts on the basis of rate cards on the basis that someone will take it – but if you look at the quality of IT staff these days, with outsourcing still in vogue… low rates will mean low skilled and we al know what that leads to (GIGO).
And by the way – the whole basis for this change is flawed. For HMRC to say that there are more freelance companies but fewer inside IR35… so there must be more non-compliance… that is an assumption.
To deploy a tax policy based on such an assumption is unbelievable in a 1st world, 21st century democracy.
They didn’t even bother to do some sample testing. I’m surprised that none of the bodies that purport to represent freelancers even questioned this. When the consultation came out, there was a link at the bottom that could be used to question the validity of the survey.
Did anyone do that?
I doubt it – for many years now I’ve had the feeling that contractors do not have their sharpest minds deployed on the IR35 question.
Public sector employers aren’t getting it. It’s not whether it’s inside IR35. It’s make sure it is inside IR35, remember who’s paying your wages.
[b]Kristallnacht[/b] (the night of broken glass) In May 2016 when the Public Sector persecuted contractors down the route of a master / servant relationship; by withholding evidence (local working practices) that would enable the contractors’ too properly review their status. This added an extra cost to my business c. £6,200. Yet, with a more measured approach the cost could have been kept to below £200. If there is a contract extension, and they want me to operate in a master / servant role then my rate would need to increase by 50%. Not because I want to reclaim the money loss, but the true cost of changing from a client / contractor relationship to master / servant relationship.
Will any MP’s working through a company be caught? There is no right of substitution (as an MP), a single fixed term contract, travel to Westminster must surely be “regular commuting”, provision of a second house is surely taxable? These are, after all, the people who ultimately approve IR35 legislation so presumably they fully understand that they may well fall within it?